18 July, 2011

Laws of Mudaraba and Shirkat

In Islamic Banking ‘Mudaraba’ is a type of partnership. The term Mudaraba is synonymous to MUQARADA. ‘Mudaraba’ is a word of Iraqi origin, mostly found in Imam Abu Hanifa and Ibn-e-Hambal’s work.
Kerad or Muquarada is a Hegazi Word, generally found in Maliki and Shafei’s Writings. Mudaraba means contact between tow parties. One pays capital to other to run the business, Sharing of profit on agreed ratio. Loss will sustain by the capital supplier only. Capital supplier is known as ‘Shaibul Mal’ or ‘Robb-ul-Mal’ and Entrepreneur is ‘Mudarib’. This formula was prevalent in pre-islamic society and endorsed by Islam. All the Muslim Jurists have agreed that Mudaraba is a very useful form of business organization.

Types of Mudaraba:

1.General Investment Mudaraba which is not limited by time, place, trading items or any kind of restrictions.
2.Specific Purpose Mudaraba which has been limited by some restrictions.

Status of Islamic Bank under Mudaraba system of business transactions:

Mudarib, -at the time of receiving deposit.
Saheb-ul-mal- when the bank invests the fund,
When the bank is the Mudarib, it favours a general investment Mudaraba,
When sahib-ul-mal, its choice is a specific purpose Mudaraba.

Condition for Valid mudaraba contract:

1.Capital should be known at the time of contract.
2.Capital should consist of cash in the form of Dinar, Dirham and paper money. Commodities are not allowed as capital. Now a days, gold and silver have also become commodities.
3.Capital should be in possession of Sahe-ul-mal to give it to Mudarib. Debt cannot constitute a capital for Mudaraba business.
4.Mudarib will handle the capital alone. Participation of the Saheb-ul-mal in the work of mudarib will void the contract.
5.Share of profit should be determined as half, one third, or 30%, 40% etc. not as $ 30 or $40 /- so on.

Rights of Saheb- ul- mal :
1.Profit will be divided in presence of the Saheb-ul-mal.
2.The Mudarib can not take his share in the absence of Saheb-ul-mal.

Rights of Mudarib:
1.Mudarib has the right to share of the profit for his efforts.
2.In spite of his sincere efforts if the business incurred any loss, no recovery could be made for such loss.
3.He has the right to run the business freely without interference of the Saheb-ul-mal.
4.If the contract is nullified he has the right to receive remuneration for his labour in capacity of a servant in business.
5.Right to re-imburse the expanses in connection with essential business tour ( conveyance, boarding lodging etc).

Advantages of Mudaraba System:
1.Co-operation between haves and have nots.
2.Utilisation of idle funds.
3.Development of entrepreneurship and self employment.


Shirkat means partnership. Two or more persons jointly contribute capital and share the profit and loss. Here share of profit will distribute on agreed ratio and Loss according to capital contribution.
Shirkat was very popular at the time of prophet (S.M.) and his companions, not only in trade & commerce but also in agriculture and gardening.
Shirkat in agriculture is known as “Mozarea”.
Shirkat in gardening is called “Mosakat”.

Conditions for valid Shirkat Contract:
1.Contract should be common and acceptable by all the partners.
2.According to Imam Sharakhsi, contract should be in writting.
3.Capital contribution of each partner should be clearly stated.
4.Capital should be in hand at the beginning of the contract to ensure that the capital is in possession of the firm.
5.The date, month, year when the firm come into being must also be mentioned in the contract to avoid future disputes.

Classification of Shirkat

1. Shairkat-al-Mufavada:
Mufavada means equality in everything, Capital – Profit – Loss.
Equal Status of all the partners in respect of religion and social position.
Not valid between a believer and non-believer, master and slave.
Equal in assets and liabilities.

2. Shirket-al-Inan:
Most popular type of partnership.
Contribution of capital and share of profit equal or inequal.
Share of profit may be inequal in-consideration of their difference in labour, skill, ability, and goodwill.
Valid between man and woman, master and servant, muslims and non-muslims.
The Maliki and Shafei Schools Say, profit should be distributed in proportion to capital contribution.
The Hanafi and Hambali Schools Say according to the terms of agreement.

3. Shirkat-al-Sanai:
Partner with skill.
No capital interms of money.
Share of profit equal or in equal as per agreement.

4. Shirkat-al-Wajooh:
It means integrity and reputation.
Partner to run the business on credit.
Share of profit must be equal.
All the partners have equal right to terminate the organization.
At the death of any partner the firm is automatically terminated.

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